SA should straighten up and fly right, says the OECD

South Africa should lower interest rates, raise electricity tariffs, rethink the collective bargaining system and control rand appreciation, says the Organisation of Economic Cooperation and Development (OECD).

In its latest economic survey of South Africa, published on March 4, the organisation said that South Africa's weak growth coming out of the 2008-2009 global economic recession places it among the ranks of developed OECD countries – which include countries such as the United States, the United Kingdom, Australia, Japan and much of Europe – rather than with the dynamic emerging economies of the Bric (Brazil, Russia, India and China) countries. But what growth there is has not been inclusive.

Income inequality has not been reduced since the end of apartheid and the country has a Gini coefficient of 0.70, one of the highest in the world.
In 2006, gross domestic product was at a level above its potential, but it is now below its potential output. And because of an underachieving education system, South Africa faces the paradox of skills shortages and high levels of unemployment.

"South Africa has weaknesses in the labour market and weak competition in the product market," said Ángel Gurria, secretary general of the OECD.

Both create barriers to entry for emerging entrepreneurs and for the unemployed looking for work.

The report recommended expanding the scope of the Competition Commission and reducing the dominance of parastatals, as well as a rethink of the collective bargaining system.

"In many countries, the idea that you apply the same deal to the whole sector is fading and bargaining is conducted at company level," said Gurria.

The report suggested that lowering interest rates might do more good than some would like to think, because inflation was largely under-controlled. Though it has increased, core inflation has remained below the 6% target range.

But collective bargaining settlements have been on a downward trend, falling from 9% increases in 2009 to 7.5% in 2012. And South Africa's interest rates are high, compared with countries that also boast "sizable negative output gaps".

The overvaluation of the rand is preventing exports from gaining pace, the report warned. Gurria said this did not mean the exchange rate should be fixed, but that the rand needed to be less volatile.

"A few years ago, South Africa was the sexy thing, and interest rates were higher than elsewhere so it looked like a good bet," he said. "By betting on the rand, the rand went up. But then your competitiveness disappeared ... Now the rand is devaluing … it is difficult to plan and invest and to know how to plan ahead."

But implementation is another thing. As Gurria noted: "We provide to the authorities the comparators; we say this is how you look in the photo compared to all the other countries of how taxes work ... In the end it's a very political decision."